TD Securities expects the Federal Reserve to keep the fed funds rate at 3.50–3.75% at the April FOMC. It expects Chair Powell to avoid firm guidance on the next policy move.
The note says the labour market remains balanced, while headline inflation has risen due to an oil shock linked to Iran. It expects the Committee to repeat a patient approach because uncertainty remains high.
Powell Status And Leadership Outlook
It reports that the Department of Justice has dropped its investigation into Powell, which could make this meeting his last as chair. It adds that whether Powell stays on as a governor after Warsh is confirmed would be Powell’s decision.
Warsh’s Senate hearing is described as providing limited clarity on near-term policy. The note expects immediate rate cuts to be difficult amid uncertainty tied to the Iran conflict.
TD Securities forecasts the Fed stays on hold until September 2026, then delivers 75 bps of easing through March 2027. It projects 50 bps of cuts in September and December, plus 25 bps in March 2027, taking the rate to 3.00%.
It says underlying inflation may improve as tariff and oil effects fade. It also points to Q1 ECI data this week as a check on labour-cost pressures.
Trading Implications For Rates Volatility
With the Federal Reserve expected to hold the policy rate at 3.50-3.75%, the immediate outlook is for stability in short-term rates. The Iran-related oil shock, which we saw push Brent crude past $110 a barrel in February, is keeping the Fed cautious for now. This suggests that selling short-dated volatility, such as weekly or monthly options on SOFR futures, could be a viable strategy to collect premium while the Fed waits.
Given the heightened uncertainty, however, this period of calm may not last. Any escalation or de-escalation in the Middle East could cause a sharp move in rates and oil prices. Therefore, buying longer-dated options expiring after the summer, perhaps around the September FOMC meeting, could serve as a valuable hedge against a sudden policy shift.
We see a path for rate cuts beginning in September, totaling 50 basis points by the end of this year. Traders could position for this by buying interest rate futures contracts that settle in late 2026, such as the December SOFR futures, to lock in today’s higher rates. This reflects the view that as oil and tariff impacts fade, the Fed will resume its easing cycle.
The labor market remains balanced and is not seen as an inflation risk, with recent payroll reports averaging a solid 200,000 jobs and the Q1 Employment Cost Index showing wage growth moderating. This reinforces the idea that the current inflation spike is temporary. We recall the aggressive hiking cycle of 2022-2023, and the Fed’s current patience shows they want to avoid reacting to transitory supply shocks.
The expected transition from Chair Powell to Kevin Warsh introduces another layer of uncertainty. Warsh has been critical of the Fed’s past performance on inflation, suggesting a more hawkish long-term stance. This could mean any easing cycle that begins in September might be shallower or shorter than previously anticipated, affecting derivative pricing for 2027 and beyond.
